This paper explains why trade liberalizations occur in developing countries,
and why they are often reversed. It does so by focusing on the use of
lobbying for protection by import competing firms as a means to postpone
costly product quality upgrades to keep up with foreign competitors. Given
the availability of a political market for import tariffs, domestic firms
will lobby for a sequence of tariffs that insulate domestic profits from a
widening quality gap, thereby allowing adjustment to be postponed. But as
the contributions required by the government grow with the size of the
quality gap, it will be optimal to adjust quality and to decrease the
lobbying effort at some time, leading to liberalization and technological
catch-up. But then the equilibrium tariff will again be small and "cheap",
and it will pay to start lobbying anew, until the next quality adjustment.
Therefore, cycles in protection will occur as a result of the use of
lobbying as a substitute for innovation. The model thus sheds new light on
the impact of the costs of protection on the effectiveness of the lobbying
effort over time, and on their implications for the timing and the time
horizon of trade reforms in developing countries.